Angolan/OPEC Relations: Toxic or Worse?

On Tuesday, news broke of Angola’s decision to back out of a deal with Cobalt International Energy to purchase an oil discovery for $1.8 billion.

Sonangol, Angola’s state energy firm, had reached an agreement with the Texas-based company a year ago, but Isabel dos Santos, the billionaire daughter of the Angolan president and Sonangol’s new boss, advised Cobalt to find a new buyer for its assets, which lie off the Angolan Coast, earlier this week, according to The Financial Times.

The move, which distances Sonangol from an ongoing United States Department of Justice investigation into Cobalt’s conduct in Angola, serves as a show of strength for Santos, after several members of her father’s political opposition called her appointment a clear sign of nepotism.

Santos’ refusal to accept the deal shows the new leader’s willingness to make meaningful breaks in preexisting polices and structures in a difficult economic period for Angola.

However, despite the effect of this decision on national or bureaucratic morale, Angola’s financial standing continues to crumble, along with its public services apparatus.

As The Washington Post’s Kevin Sieff reported earlier this week, most hospitals in Angola have run out of needles, surgical gloves and other essentials. Medications are few and far between, and spending on hygiene services, such as trash collection, has been slashed, causing a preventable outbreak of yellow fever in the country’s capital city.

“Now, when you go to any ministry and ask for something, the answer is the same: ‘We don’t have the money,” Francisco Songne, the top UNICEF representative in Angola, told The Post.

Angola’s main source of government revenues comes from the oil and gas sector, which makes up 45 percent of the nation’s gross domestic product and over 95 percent of export revenues, according to data from the Organization of Petroleum Exporting Countries (OPEC).

The lack of diversification of the Angolan economy has made it especially vulnerable to the ongoing oil price crisis, which has seen barrel rates drop from highs of over $100 in 2014 before settling to just above $40 earlier this week.

Official estimates suggest the marginal production cost for Angola to produce one more barrel of oil stands at $40, but the overall breakeven price for Angola, as of the latest metric available, stands at $94 per barrel. This means that if the forecasts by major international energy institutes hold true and Brent prices reach $52 a barrel next year, Angola will be better positioned to profit off of oil sales as production increases, but may struggle to offset all general government expenditures unless oil returns to higher levels. Related: 6 Signs The Big Global Switch To Solar Has Already Begun

In April, Angola topped Nigeria as the top producer of crude in Africa for the second time in four months. This happened not just because of declining outputs from Nigeria due to the effects of attacks by separatist groups in the Niger Delta, but because Angola saw its oil output rise to 1.782 million barrels per day in March from 1.767 million barrels per day in February, OPEC reported.

“Crude oil output increased mostly from Iran, Iraq and Angola, while production decreased in UAE, Libya and Nigeria,” the 13-member bloc said in the document, though new data from independent sources suggests OPEC’s lack of leadership in drawing down oil production has been causing its own members to economically drown in the glut.

Currently, Angola uses its oil as a mode of repayment for the $25 billion in debt it owes to China for energy development.

“As recently as five years ago, just over half of Angola's 50-60 monthly cargoes went toward paying oil majors, with as few as four to five cargoes going to pay back pre-financed deals, leaving the country's state oil company, Sonangol, with as many as two dozen to sell on the market or to term buyers with ongoing contracts,” Libby George of Reuters reported in March.

George’s conversations with oil traders in Angola showed that the number of cargoes the country could freely sell had fallen to less than 10 as the value of each unit declines due to the persisting oil oversupply.

Another Reuters’ survey on Monday tallied output from every OPEC member over the last month, revealing that increased production rates from countries within the organization had caused barrel prices to decrease by 20 percent – from just above $50 to just above $40 – over the course of the summer. Related: Is Iowa The Next Nigeria? Arson Suspected in Pipeline Fire

To meet an uptick in seasonal demand for oil, Saudi Arabia - OPEC’s de facto leader and top exporter - kept production levels close to record highs in order to limit Iran while it attempts to regain lost market share.

As the geopolitical battle between Saudi Arabia and Iran plays out internationally, countries such as Angola, which enjoy the oil economics that could allow for a successful fiscal rebound from the oil pricing crisis, continue to be stymied, instead of stimulated, by the inter-regional organizations that govern their key industries.

Regional rivalries occurring outside the African continent will continue crippling Angola’s prospects until members of the bloc agree on a unified strategy to lower production and allow their own economies to recover.